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My Sunday Washington Post Business Section column is out. This morning, we look at whether stocks are cheap or expensive.
The print version had the full headline Are Stocks Cheap or Not? How to Tell. The conclusion is surprisngly middle of the road.
Here’s an excerpt from the column:
“To know whether stocks are cheap or pricey, we typically look at price-to-earnings ratio. Valuation is a tougher question than many folks realize. People forget that although we can pinpoint the price, we can only guess at future earnings. The past isn’t much help: It simply tells whether a market was pricey or cheap.
Valuation today is a function of price relative to future prospects, and that is an unknown. Sure, we have analysts’ consensus estimates as to future revenue, earnings and cash flows, but truth be told, these are at best an informed guess. A McKinsey study found that on average, analysts’ forecast were too bullish by nearly double. (The exception was at market lows, when they were too bearish). So keep that in mind whenever you think about valuations.”
Its a good exploration of various metrics.
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Source:
Are Stocks Cheap or Not? How to Tell
Barry Ritholtz
Washington Post, March 23, 2014
http://www.washingtonpost.com/business/how-to-know-whether-stocks-are-cheap-or-pricey/2014/03/20/ec105d54-ae2c-11e3-9627-c65021d6d572_story.html
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